Trust perpetuities

A trust holds assets for other people. It cannot hold them for ever.

The workbook is blunt about it. The trust cannot be perpetual. Indian law restricts the perpetuity period.

Two separate things are capped.

The first is how long a gift inside the trust may take to vest. The clock runs through the lifetime of a person who is alive on the day of the transfer. Then it runs through the childhood of someone who comes into existence at the end of that life. It stops when that child reaches 18.

The second is how long trust income may be piled up instead of paid out.

There is one exception, and it is a wide one. Property settled for the benefit of the public is outside the rule. The workbook lists the purposes: religion, knowledge, commerce, health, safety, or any other object beneficial to mankind.

So a charitable trust may run on and on. A family trust may not.

The vesting rule. Section 15.6.11 states it as a limit on what a transfer can create. No transfer of property can operate to create an interest which is to take effect after (a) the lifetime of a person living at the date of such transfer, and (b) the minority of some person who comes into existence at the expiration of that period, and to whom the interest created is to belong when he or she reaches 18 years of age.

So the outer limit is a life in being, plus a minority, ending at 18. An interest that is to vest later than that cannot be created.

The exception. The exception to the rule against perpetuity relates to transfers of property for the benefit of the public in advancement of religion, knowledge, commerce, health, safety or any other object beneficial to mankind.

What follows for a Will. Except for charitable bequests, a bequest in which the vesting of the property is to occur after the lifetime of one or more persons will not be valid.

The accumulation rule, and its two different 18-year clocks. The workbook gives the same number twice, measured from two different dates, and the distinction is exactly what a question turns on.

Subject to the exceptions prescribed under statute, the accumulation — wholly or partly — of any income from property is not allowed for a period longer than the lifetime of the transferor or 18 years from the date of transfer, whichever is later.

And where a Will directs that income arising from property can be accumulated, wholly or in part, during a period longer than 18 years from the death of the testator, that direction is — subject to exceptions — void to the extent that the period exceeds 18 years. The workbook then says what happens at the end: at the end of the 18-year period the property and the income will be disposed of.

Note what "void to the extent" does not do. It does not invalidate the whole direction, and it does not invalidate the trust. It cuts the accumulation short at 18 years and then requires the property and the accumulated income to be dealt with.

Where this sits among the trust rules. Section 15.6.11 comes between the trust taxation subsections and 15.6.12, which treats the trust as a pass-through entity, and 15.6.13, which deals with stamp duty and capital gains on the transfer of assets into a trust. Perpetuity is the durability limit on an arrangement those two sections otherwise make very attractive.

Illustrative figures; the workbook states the rule without a worked example.

Mr Vaze, aged 68, settles a commercial property worth Rs 2,60,00,000 on a private trust in 2026. His son Anirudh, aged 40, is alive on the date of transfer. The trust deed says the capital is to vest in Anirudh's first child, who is not yet born.

Testing the vesting clause.

The deed is inside the perpetuity period. Now change one word. Suppose the deed says the capital vests in that child at 30 instead of 18. The interest is then to take effect after the minority ends, which is past the limit the workbook states.

Testing the accumulation clause. Suppose the deed also directs that the property's rent — say Rs 15,00,000 a year — be accumulated rather than distributed.

Allowed period = longer of:
   (a) the lifetime of the transferor, Mr Vaze
   (b) 18 years from the date of transfer, i.e. to 2044

If Mr Vaze lives to 2050, the accumulation may run to 2050, because his lifetime is the longer of the two. If he dies in 2030, the accumulation may still run to 2044, because 18 years from the transfer is then the longer.

Now put the same direction in his Will instead. The clock changes. Accumulation is measured as 18 years from his death. If he dies in 2030, a direction to accumulate to 2060 is void as to the excess: the accumulation stops in 2048, and at that point the property and the income accumulated — roughly Rs 15,00,000 x 18 = Rs 2,70,00,000 of rent before any growth, on top of the Rs 2,60,00,000 property — must be disposed of.

And the route that escapes all of this. Had Mr Vaze settled the same Rs 2,60,00,000 on a trust for the advancement of knowledge — a school endowment — the rule against perpetuity would not apply at all, and the arrangement could continue indefinitely.

Chapter 15 (Tools for Estate Planning), section 15.6.11 Trust Perpetuities, is the whole of this term: the statement that a trust cannot be perpetual, the vesting limit built on a life in being plus a minority ending at 18, the public-benefit exception with its six named purposes, the invalidity of a non-charitable bequest vesting after the lifetime of one or more persons, and the two accumulation limits — lifetime of the transferor or 18 years from transfer, whichever is later, and 18 years from the death of the testator for a direction in a Will.

Expect a question asking whether a trust can be created in perpetuity — it cannot, except for public-benefit purposes — and a question on the accumulation period, where the two different starting points are what separates a right answer from a wrong one.

• 18 years appears three times with different starting points. The minority of a person born at the end of a life in being; 18 years from the date of transfer; and 18 years from the death of the testator where a Will directs accumulation. A question that names one date is testing whether you picked the right clock.
• For a transfer, the accumulation limit is the LONGER of the transferor's lifetime and 18 years — "whichever is later", not whichever is shorter.
• For a Will, it is a flat 18 years from death. The transferor's lifetime plays no part; he is already dead.
• An over-long accumulation direction is void only as to the excess. The trust survives; the accumulation is cut back to 18 years, after which the property and income are disposed of.
• The exception is public benefit, not charity in a loose sense. The workbook names religion, knowledge, commerce, health, safety, or any other object beneficial to mankind. Commerce is on that list, which surprises candidates.
• A non-charitable bequest vesting after the lifetime of one or more persons is not valid. This is stated separately from the general vesting rule, and specifically for bequests.
• This is a durability limit, not a tax rule. It sits beside the pass-through and stamp duty subsections but does nothing to either. A testamentary trust still pays no stamp duty and no capital gains; it simply cannot accumulate income for ever.